Do The Metals Have To Rally With Negative GOFO?

Includes: GLD, SLV
by: Avi Gilburt

There are many fundamental reasons out there that have been put forth over the last several years which have provided bulls with continuous ammunition as to why they must be long in the metals. We have heard about India and China demand. We have heard that QE will cause metals to soar. We have heard that the government shut down will have a positive effect upon the metals. Ultimately, note one of these has caused the reaction that everyone seemed to staunchly believe.

Yet, I keep reminding folks that trading metals is not about belief. Rather it is all about sentiment.

So, now, I hear nothing but the fact that negative GOFO is going to cause the metals to rally beyond all expectations. So, what really is GOFO that makes people "believe" in the latest and greatest reason to hang their hats upon for a rally?

GOFO stands for Gold Forward Offered Rate. These are rates at which contributors are prepared to lend gold on a swap against US dollars. Quotes are made for 1-, 2-, 3-, 6- and 12-month periods. Many gold traders associate negative GOFO with backwardation, which is when the spot price fetches a higher price than the nearest futures contract. This is when there is a shortage of physical gold.

However, many analysts merely see the backwardation of gold and the negative GOFO more likely to be a factor of changing money market interest rates or inflation rates.

But, have any of those that have been on the "negative GOFO" bull soap-box mentioned that this situation has persisted since just before the summer? But, we have not seen the metals blow the door off their resistance regions yet, have we?

But, as you know, I don't take cues from news or other fundamental analysis. Rather, I track sentiment based upon patterns I see in the market.

Last week, I noted how important the 131.50-133 region is as resistance for GLD. Well, GLD was stopped cold this past week with a high of 131.44 and began to drop. Furthermore, silver futures topped in their respective resistance region as well. The question now is whether the current decline will pick up speed, or maintain support at our lower Fibonacci support levels.

As I have said several times in the past, I will likely be keying off the GLD chart for further clues. The main support levels now are 126, 123 and 119/120. I will be watching our technical indicators very carefully for a bottoming or breakdown signal over the upcoming week. If we are able to maintain support, and then take out the 131.50 with strong buying volume, my next ideal target is in the 145 region. So, for those that are still short GLD, my suggestion would be to maintain stops just over the 131.50 level. And, for those that are interested in going long on this pullback, I would likely maintain stops on longs just below the 123 region.

No matter which way you may believe that this market is headed in the near term, this upcoming week should provide us with our next larger directional signal. But, I am personally trading this region very carefully, since I am unsure right now which way this pattern will most likely break. And, yes, there are times when the market does not provide you with a clear signal, so I remain more vigilant during such times. Yet, no matter which way this goes in the near term, I am still not wholly convinced that the lows for this market have yet been seen.

Disclosure: I am long GLD, SLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have intermediate term calls on GLD, which will be stopped out on break down below 123, and have moved stops down to just under 132 on my longer term short on GLD from the 138 region. I also own SLV LEAPS.